Around this time of year, it’s extremely easy to blow your end of year bonus on vacations, gifts for friends and family or that really nice watch you’ve had your eye on for a while… but you might want to reconsider those impulsive purchases and think about your future. Below are 4 other areas to invest your bonus in that you’ll thank yourself for later:
Increase your 401(k) contribution.
You should already be contributing to your employer’s 401(k) retirement account and be taking full advantage of any available company match program if one is available, but if you get a bonus, that’s a great opportunity to increase that contribution.
The more you can set aside today, the better off you’ll be in the long run, thanks to the power of compound interest.
2. Start a 529 savings plan for your kid.
At many top colleges, the total cost for the academic year tops $60,000 and is only getting more expensive.
Time has a way of flying by, and before you know it, you’ll be responsible for a hefty tuition bill. Take your bonus and put it towards a 529 savings plan, a state-sponsored, tax-advantaged investment account that you can start when your child is born.
These plans allow a parent to contribute up to $14,000 a year — $28,000 for a couple — for each of their children’s college educations. It also allows anyone (a grandparent, godparent, or particularly generous neighbor) to contribute to the fund.
3. Pay off lingering debt.
If you have debt — whether it’s student loans, car loans, or credit card debt — a bonus can be a great way to start tackling it aggressively. Especially if the interest rate on your debt is high, you’ll want to pay it off as fast as possible, as interest can cost you thousands in the long run.
If you aren’t sure where to start, consider the advice from 13 real people who paid off thousands.
4. Start, or contribute more to, an emergency fund.
Not setting aside money in an emergency fund is a common (and costly) mistake — it’s easy to ignore the possibility of your car breaking down, a medical emergency, or losing your job, but these are all scenarios that could quickly become expensive realities.
Use your bonus create an emergency fund if you haven’t done so already.
The amount of savings you need is highly personal, so it isn’t usually measured in terms of dollars; rather, it’s months of living expenses that money could cover. A general rule is that it’s smart to have six months’ worth of savings tucked away, but you may need more or less depending on your situation.